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Further weakening of peso seen

/ 05:28 AM October 06, 2018

Skyrocketing global oil prices will further weaken the peso as well as make it costlier to borrow money, London-based Capital Economics said.

“The biggest impact of a period of sustained higher oil prices would be in India and the Philippines, whose current account deficits would be pushed even more into the red, putting further downward pressure on their currencies,” Capital Economics Asia economist Krystal Tan said in an Oct. 4 report titled “What does the recent jump in oil prices mean for Asia?”

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Capital Economics noted that the price of Brent crude already jumped to $86 per barrel from only $54 last year.

Capital Economics sees energy inflation falling back in the coming months across emerging Asia and impact gradually on headline inflation, except in the Philippines where the average rate of increase in prices of basic commodities was already above target.

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As of September, the inflation rate averaged 5 percent, beyond the government’s 2-4 percent target range.

“The recent rise in oil prices makes it even more likely that the country’s central bank will raise interest rates again this year,” Capital Economics said.

The Bangko Sentral ng Pilipinas already hiked the key policy rate by 150 basis points so far this year, with a back-to-back 50-bp hike in August and September.

“Higher oil prices are also likely to lead to an increase in external vulnerabilities in some countries …. The most vulnerable countries are the Philippines and India,” Capital Economics added, citing that the two countries were net oil importers and both with current account deficits.

“We estimate that the deficits of these two countries would widen by around 0.5 percent of GDP (gross domestic product) if oil prices remain at their current level, putting further downward pressure on their currencies,” according to Capital Economics.

The peso already fell to almost 13-year lows partly on market concerns on the widening current account deficit.

As of end-June, the current account deficit widened to $3.1 billion—equivalent to 1.9 percent of GDP, from $133 million (or only 0.1 percent of GDP) a year ago, mostly on the back of an also wider trade-in-goods deficit as imports sustained their fast climb while merchandise exports declined. —BEN O. DE VERA

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TAGS: global oil prices, higher oil prices, London-based Capital Economics
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